CFA Institute CFA-LEVEL-1 Online Practice Questions and Exam Preparation

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 951:

  Abra, a vice-president at Mahogany, Inc., recently revealed - quite inadvertently - information about the tender offer from Mahogany to Kadabra, his friend who works for a rival firm. Kadabra, in turn, shared this information with his trading buddy, Cosmo. Cosmo immediately recognized that in light of this information, he was better off not participating in the offer. He went ahead and shorted the stock of Mahogany and reaped a tidy profit of about a hundred thousand dollars in a month's time when Mahogany tanked. In this case:

  I. Cosmo can be held liable for insider trading under SEC Section 10(b) and Rule 10b-5.

  II. Cosmo can be held liable for insider trading under the Misappropriation Theory.

  III. Cosmo can be held liable for insider trading under SEC Rule 14e-3 which prohibits insider trading based on information about tender offers.

  IV.

  Kadabra has breached his fiduciary duty toward Mahogany.

  A. I, II, III and IV.
  B. I only.
  C. none of these answers.
  D. III only.
  E. I and IV only.
  F. IV only.
  G. II and III.
  H. II only.
  C. none of these answers.

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  Explanation

  This case is similar to the precedent set by United States vs. Chestman. According to the decision in the Chestman case, Kadabra was a "gratuitous recipient" of inside information and as such, had no responsibility to maintain its confidentiality. One party - according to this ruling - cannot unilaterallyimpose a relationship of confidence on another by simply sharing information. Thus, while Kadabra is a tippee, he has no fiduciary duty toward Mahogany. Now, the traditional theory applies only when there is a breach of a direct or inherited fiduciary duty or if the insider trading occurs in a tender offer and the trading is done by an insider or a tippee. So if an outsider - including Cosmo - received and traded based on this information, he could not be held liable under the Traditional Theory or the Misappropriation Theory. However, if Kadabra had traded for his own account, he would be liable under both the theories as well as under Rule 14e-3.

• Question 952:

  When a plant asset is sold for more than its book value:

  A. cash received plus accumulated depreciation plus gain on disposal equals the original cost.
  B. cash received plus accumulated depreciation minus gain on disposal equals the original cost.
  C. book value of the asset minus gain on disposal equals cash received.
  D. original cost minus accumulated depreciation equals cash received plus gain on disposal.
  B. cash received plus accumulated depreciation minus gain on disposal equals the original cost.

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  Explanation

  Gain or loss on disposal of a fixed asset is calculated by subtracting the book value (Original cost - Accumulated Depreciation) from the cash received.

• Question 953:

  Which of the following is/are true about computation of Basic EPS?

  I. With stock splits and stock dividends, previously reported EPS numbers are retroactively readjusted.

  II. Shares issued for the acquisition of another business are included from the date of issuance.

  III.

  Shares issued in pooling of interests are assumed to have been outstanding at the beginning of all the periods reported.

  A. II and III
  B. I, II and III
  C. I and III
  D. I only
  B. I, II and III

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  Explanation

  In the computation of basic EPS, one must be careful about the time period for which shares are assumed to be outstanding. This becomes an issue when the firm issues new shares or reacquires outstanding shares during the accounting period. Further, the purpose for which the shares are issued are also of concern since the computation of the weighted number of shares outstanding must be consistent with the logic behind the accounting treatment of the newly issued shares. Hence, when shares are issued for the acquisition of another business, they are considered as equity issued to raise new capital for investment and therefore included from the date of issuance. On the other hand, under pooling of interests method, the merged companies are assumed to have been a combined entity since their respective inceptions. Therefore, when shares are issued under pooling of interests, they are assumed to have been outstanding at the beginning of all the periods reported. Finally, stock splits and stock dividends change the number of shares without any direct impact on earnings. Hence, for consistency, previously reported EPS numbers are retroactively readjusted.

• Question 954:

  Indie Carson, management consultant, wants to become a portfolio manager. While researching the position, she learns that obtaining the CFA Charter is very important. She decides to take the Level 1 examination this June, and begins to study. During the reading on efficient markets, she rethinks her new career choice. If markets are efficient, what is the role of a portfolio manager? Distraught, she e-mails her mentor, LaMeda Durio. Durio wants to use the occasion to help Carson study, so she e-mails Carson the following reply (summarized in points A through D below) and asks her to identify the INCORRECT statement. Which of the following choices does Carson select as FALSE? Assuming an efficient market, portfolio managers assist clients with:

  A. minimizing transaction costs.
  B. quantifying risk tolerances and return needs.
  C. rebalancing the portfolio when necessary.
  D. diversifying globally to reduce systematic risk.
  D. diversifying globally to reduce systematic risk.

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  Explanation

  This a "trick" question. Although portfolio managers can help clients diversify globally, they do so to reduce unsystematic risk. Systematic, or market risk, is undiversifiable. The other statements are true. There are three ways for a portfolio manager to minimize transaction costs: reduce taxes, reduce trading volume (turnover) and minimize liquidity costs by trading relatively liquid stocks.

• Question 955:

  A sample of single persons receiving social security payments revealed these monthly benefits: $826, $699, $1,087, $880, $839 and $965. How many observations are below the median?

  A. 1
  B. 3
  C. 2
  E. None of these answers
  B. 3

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  Explanation

  Order the sample: 699, 826, 839, 880, 965, 1087. The median is somewhere between 839 and 880. So there are three observations below the median.

• Question 956:

  A firm has convertible bonds, preferred equity, common equity and straight bonds in its capital structure. In calculating Diluted EPS, which of the following is true about the earnings number used, assuming the convertible bonds are dilutive?

  A. Earnings used = Net income - preferred dividends + interest payments on convertible
  B. Earnings used = Net income - preferred dividends - interest payments on convertible net of taxes.
  C. Earnings used = Net income - preferred dividends - interest payments on convertible before taxes.
  D. Earnings used = Net income - preferred dividends + interest payments on convertible net of taxes.
  D. Earnings used = Net income - preferred dividends + interest payments on convertible net of taxes.

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  Explanation

  Think of the earnings used in EPS calculations as the earnings that are available for distribution amongst common shareholders. Under Diluted EPS, convertible bonds are assumed converted if dilutive. Hence, for Diluted EPS purposes, convertible bond holders are assumed to be a part of the residual claimants of the earnings available after the liabilities to debt holders and preferred equity holders are satisfied. The earnings available for distribution amongst these security holders then equal Net income - preferred dividends + interest payments on convertible net of taxes.

• Question 957:

  The weekly mean income of a group of executives is $1,000 and the standard deviation of this group is $100. The distribution is normal. What percent of the executive have an income of $925 or less?

  A. About 23%
  B. About 15%
  C. About 85%
  D. About 50%
  E. None of these answers
  A. About 23%

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  Explanation

  z = (x-u)/sigma = 925 - 1000/100 = -0.75. From z-table z = 0.75 is 0.2734. So 1.0 - 0.7734 = 0.2266.

• Question 958:

  A critical part of Standard IV (A.2) is to distinguish between:

  A. research reports and investment memoranda.
  B. insider trading and appropriate trading.
  C. CFA charterholders and non-CFA charterholders.
  D. none of these answers.
  E. employees and independent contractors.
  F. industry and company analysis.
  G. the buy side and the sell side.
  H. facts and opinions.
  H. facts and opinions.

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  Explanation

  Standard IV (A.2) - Research Reports states the responsibility of AIMR members, CFA charterholders and candidates to include in each research report those key facts that are instrumental to the investment recommendation presented in the report. A critical part of this requirement is to distinguish clearly between opinions and facts.

• Question 959:

  Assuming that the dividend payout ratio is 0.4, net income is 100, net sales are 400, and the equity is 500, what is the growth rate of earnings of the firm?

  A. 8%
  B. 12%
  C. 11.2%
  D. Not enough information
  E. 10%
  B. 12%

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  Explanation

  The growth rate of earnings of the firm is equal to the retention rate multiplied by the return on equity (ROE). The retention rate is equal to one minus the dividend payout ratio (1 - 0.4 = 0.6). ROE is equal to net income divided by equity (100/500 = 0.2). The growth rate is 0.6 x 0.2 = 0.12 = 12%.

• Question 960:

  Which of the following is/are a correct statement of a member's duty under the Code and Standards?

  I. In the absence of specific applicable law or other regulatory requirements, the Code and Standards govern the member's actions.

  II. A member is required to comply only with applicable local laws, rules, regulations, or customs even though the AIMR Code and Standards may impose a higher degree of responsibility or a higher duty on the member.

  III.

  A member who trades securities in a foreign securities market where no applicable local laws or stock exchange rules regulate the use of material nonpublic information may take investment action based on material nonpublic information.

  A. I only.
  B. III only.
  C. I and II only.
  D. II and III only.
  A. I only.

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  Explanation

  This question pertains to Standard I, Fundamental Responsibilities - specifically, international application of the Code and Standards. If applicable law is more strict than the requirements of the Code and Standards, members must adhere to applicable law, otherwise, members must adhere to the Code and Standards - thus, I is correct. Members must adhere to the higher standard set by the Code and Standards if local applicable law is less strict- thus, II is incorrect. When no applicable law exists, the Code applies - thus, III is incorrect.